The year is 2016. You stand in line at the clothing store, your sleek black Visa Infinite card in one hand and a pair of pants—also black, a tad less sleek—in the other. You approach the till and proffer your card. But the clerk waives it away with a weary “we don’t take that one,” and points to a small sign delineating which varieties of Visas are acceptable to the clothing chain. They do accept the Gold Visa of the young mother standing behind you, but she’ll have to pay a couple of extra bucks for the privilege. How, you wonder as you slink out of the store, did we wind up in this dark retail dystopia? I’ll tell you.
Since 2008, Canadian retailers have been squabbling with credit card companies over the fees they pay to accept credit-card payments. Shopkeepers want leverage to negotiate lower fees so they don’t have to hike prices; credit companies oppose changes that would make it more difficult to use their cards. Both sides cast their arguments as “putting consumers first.” And now, the Conservative government wants to play too. Next month’s throne speech will put forward its own “consumers first” agenda, according to the National Post. Not content with fussing with the telecom and airline markets, the government now might step into the credit card donnybrook too.
That’s a bad idea. There is a simple, common-sense, no-new-regulations-needed solution available to retailers that would give them bargaining power over credit card companies and benefit their customers too. They just need to stop waiting for Finance Minister Jim Flaherty to solve their problems.
Three years ago, retailers found a champion in the Competition Bureau when it launched an investigation into Visa and MasterCard, which process 90% of the credit card transactions in the country. The watchdog objected to several of the companies’ policies, including a requirement that shopkeepers accept all types of cards issued by a particular company—they can’t accept the Visa Gold Elite, for example, but decline the Visa Infinite. Retailers object to this “honour all cards” rule because not all cards are created equal: sellers pay upwards of 3% to process “premium” cards, like the Infinite, compared with 1.5% for others. A $400 pair of snow tires rung through with a debit card would cost the merchant just 12¢; a credit card could top $12. Retailers wanted to mitigate these exponentially higher fees by passing them along to customers with a surcharge. But this, too, is forbidden by the card issuers.
Ultimately, the Competition Tribunal proved unsympathetic to the retailers’ plight—which is good news for all of us. Killing the “honour all cards” rule would create endless aggravation at the cash register and stifle competition too (smaller, upstart banks like Capital One have become major players in Canada in part because no matter the bank’s size or reach, customers can rest assured that stores are still guaranteed to accept their cards). The ban on surcharges is also beneficial to consumers. Retailers tend to turn these surcharges into a way to boost their own profits: one study found merchants in Australia, where the practice is allowed, imposed surcharges close to 2%—more than double the fees charged by the credit card companies.
If stores truly wanted to enhance their negotiating position with the credit card companies, they could simply offer a discount for paying by cash or debit. No customer is punished; some are rewarded. Retailers argue that discounts are complicated to implement, but that’s hogwash. Every mom-and-pop pizza joint that gives a discount for picking up your order solved this riddle years ago. And plenty of retailers offer discounts in concert with credit companies—like car rental agencies that give a discount for using a particular type of Visa. If discounts are effective in driving people to pay by credit cards, they’ll work to push them away as well.
Flaherty endorsed discounting in 2010, when the federal government unveiled a code of conduct for credit card companies. It’s a far better solution than any “consumers first” legislation—which would really just put us last.
James Cowan is deputy editor of Canadian Business